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The Case For Combating Climate Change With Nuclear Power and Fracking

Joseph B. Lassiter believes that nuclear power and shale gas are on the right side of the fight against climate change, and that markets have a better shot at winning the fight than governments do. He explains why in this story, which first appeared on the HBS Working Knowledge website.

BY CARMEN NOBEL

If you ask any given environmentalist to identify the biggest threat to the planet, you may expect to hear about man-made climate change, consumerism, or overpopulation. But if you ask Harvard Business School’s Joseph B. Lassiter, he’ll toss in another: single-issue myopia.

First, there’s the oft-discussed issue of temporal shortsightedness—the very human tendency to focus on present-day concerns without considering how our actions will affect the future. But there’s also ideological myopia—a failure to realize that compromising a little is better than staying stuck in the present path.

“Right now we’re letting the ends of the ideological spectrum and the entrenched power of legacy interests stalemate a path to the future,” Lassiter says. “That’s a thing worth fighting.”

Lassiter, the Senator John Heinz Professor of Management Practice in Environmental Management, has spent several years studying the intersection between entrepreneurial finance and environmental concerns. He recently sat down with Harvard Business School Working Knowledge to discuss the core challenges of fighting global carbon dioxide emissions in a shortsighted, ideologically polarized environment.

To his mind, both in Europe and in the United States, government efforts to regulate carbon emissions have been costly and ineffective so far, an outcome often ensured by extreme politicking from the legacy energy, transportation, farming, and environmental lobbies.

“It’s time for politicians, regulators, and voters to give markets—and the price signals that they send to producers, consumers, and entrepreneurs—a try at doing something that is both environmentally meaningful and economically sustainable,” he says.

Lassiter’s market-based proposal

His proposed market-based solution? “I think each energy source—oil, natural gas, wind, nuclear, solar, etc.—should have a market price based not only on its production costs, but also, in part, on its unique public costs reflected by revenue-neutral taxes: a carbon emissions tax, a security-of-supply tax, a catastrophe insurance tax, and even a local emissions abatement tax,” he says. “While people hate the thought of paying more taxes, we are in truth paying most of these ‘taxes’ today. Unfortunately, the political process allows these taxes—or subsidies—to be hidden in rules, regulations, and foreign policy decisions.

“The resulting market prices for energy should be enforced in international trade with border tariffs,” Lassiter continues. “And we should let markets go to work for us. I think that markets will do a much cheaper, faster job of attacking our energy and environment problems than having politicians and regulators try to solve them by selecting technologies or drafting complex rules and regulations that simply hide the costs from consumers and producers alike. The likelihood that what I just said will actually happen is vanishingly small. But I’m an old man, so I should keep on emphasizing completely obvious solutions.”

Like many people, Lassiter is concerned that the massive carbon emissions from today’s coal plants and transportation sector pose a major danger to mankind through the effects of rapid climate change. Less typically, he’s more bullish on nuclear power and hydraulic fracturing, or “fracking,” than he is on solar energy or wind power for addressing the worldwide carbon emissions problem. It’s not that he has anything against renewable energy. It’s that he hasn’t seen evidence that renewable energy sources will get cheap enough, fast enough to slow global carbon emissions, particularly those from coal-fired power plants in China and India.

“The Chinese and Indians are going to clean up their local pollution problem—particulates and sulfur emissions—from coal plants, but the carbon emissions are an entirely different matter. To have a dramatic impact on those carbon emissions, you need to find something that beats a traditional coal plant in their countries on straightforward energy economics, and that’s really, really hard to do,” he says.

The case for fighting coal with nuclear and fracking technology

Given the absolutely clear evidence that electricity significantly betters human life in the developing world, Lassiter worries that attempts to squelch nuclear and fracking efforts will just give rise to more and more coal plants around the world. “When it comes to carbon emissions, nearly anything is better than a traditional coal-fired power plant,” he says.

Lassiter argues that the world has allowed nuclear to become virtually an “orphaned technology,” despite its potential to attack the problems of carbon emissions. And in spite of recent concerns about the tragedy at Japan’s Fukushima plant, he maintains that nuclear power “is a scalable technology that has significant room for technological improvement, safety enhancement, proliferation resistance, regulatory redesign, and, yes, cost reduction.”

And what are we to do about the problem of radioactive waste, a byproduct of nuclear power generation? Lassiter points to three young companies—Martingale, Inc., of Tavernier, Florida, Transatomic Power of Cambridge, Massachusetts, and TerraPower of Bellevue, Washington. Each is working on new nuclear reactor designs to harvest and run on radioactive waste fuels, such as thorium (a waste product of rare earth mining), and depleted uranium (the waste product left in spent nuclear fuel rods). In other words, these new nuclear designs could actually consume and be fueled by materials largely considered to be radioactive waste today.

“The world probably has enough spent nuclear fuel lying around to power reactors for hundreds of years, and there is literally four times as much thorium on the planet as uranium,” Lassiter says.

Building a prototype of any one of these new nuclear designs may take 5 to 10 years and cost upwards of $1 billion, which suggests that they’re in danger of falling into the financing “valley of death,” the stage between researching a product and actually going to market with it. Even so, TerraPower has received multiple rounds of funding—and its chairman, Bill Gates, is the wealthiest person on earth. (Last year, Lassiter coauthored a business case about TerraPower’s funding issues, along with HBS colleagues William A. Sahlman and Ramana Nanda and James McQuade [HBS MBA 2011].)

“What would our world look like if we could have US levels of electricity available at affordable prices for every person on the planet for 1,000 years?” Lassiter says. “We should be working on nuclear like there is no tomorrow. We should do everything we can to encourage new nuclear and drive it to costs that are competitive with traditional coal. We need to insist that the world’s governments allow and encourage entrepreneurs to pursue nuclear with both rigorous testing and real urgency. And we need to always remember that if new nuclear or any energy alternative doesn’t match coal on straight-up cost, it won’t do much to solve the worldwide carbon emissions problem.”

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The problem with your analysis that neither natural gas derived from shale nor nuclear power are profitable economic enterprises.

Natural gas from shale or other similar geological formations are extracted using hydraulic fracturing technology. This technology is vastly more expensive than the technology used to extract conventionally developed natural gas. While the current price of natural gas on the spot market is 3 to 4 USD / Thousand Cubic Feet (tcf) [1] is profitable, this is money losing price for “fracked” natural gas. The break even price of natural gas derived from shale to above 8 USD/tcf. Most companies active in the business of extracting natural gas and other hydrocarbons from shale are losing money, even if they are producing large quantities of product. For example, Shell Oil wrote down over 2 BUSD in their north American fracking operations [2]. So long as conventional natural gas dominates the market, fracked natural gas will be a money losing operation.

The same is true of nuclear power. he only reason the civilian nuclear energy industry exists today is because of US government subsidies. The Department of Energy is largely a nuclear power subsidy. Beyond that, there are other nuclear related functions of DOE such nuclear weapons, naval reactors, commercial reactors, and research and development. In FY 2012 DOE’s National Nuclear Security Administration is authorized to spend near 12 BUSD. Civilian nuclear costs including “environmental management”, “Legacy Management”, and other costs are are 7.1 BUSD. That is 19.1 BUSD out of a total allocation of 29.5 BUSD. The DOE’s budget is largely a gigantic subsidy for the nuclear industry. (Support for the petroleum industry is a large part of the rest [3]). Nuclear power is capital intensive, building a plant is very expensive, but it is also labor intensive as it takes a significant amount of highly skilled (i.e. expensive) labor, and the raw materials / fuel (uranium) is expensive. In what free market would this type of electricity be competitive? One could add the Price-Anderson Nuclear Industries Indemnity Act of 1957 as huge government subsidy and intervention. Add to that nuclear power research funded by the Federal Government, their role in uranium mining, processing, disposal and indeed every step, there would be no civilian nuclear power industry. While you are certainly correct that nuclear generated electricity does not release GHGs, on a strict cost-benefit analysis, it just does not make sense. The disposal issues are just the tip of the iceberg. There is no form commercial energy generation that is not subsidized by the US government and no more subsidized that nuclear power.

As a result, I can agree that your proposal represents a viable for future energy policy.

Factually wrong on several counts. The real subsidy to nuclear power is about $1.20 per Megawatt-Hour of electricity generated. That’s $1.20 per 1000 KWHrs. The subsidy to coal and gas is $.80/MWHr. A similar amount.

The subsidies to wind and solar is more than $30/MWHr. Yes, more than 20 times as much as the subsidies to other energy sources. And that’s only the direct financial subsidies and not the additional subsidies of dedicated power line construction, provisions for back up power, and legislated mandates to purchase wind and solar electricity even when it disrupts grid stability.

Every nuclear power plant purchases private liability insurance. There is no insurance subsidy. The Price Waterson Act creates a pool of all the nuclear reactor’s insurance coverage in the event of a large catastrophe at a single plant. The Act has never been used, not even at Three Mile Island.

Every reactor pays a fee on electricity generated to the federal government which is more than adequate to pay for spent fuel management, if the federal government had any interest in actually managing the waste as the law requires.

Every reactor has a more than adequate de-commissioning fund held in trust, again, funded by a fee on the energy produced.

Nuclear is the only source of energy in the USA which contains all of its waste, pays for all of its waste management, and has financial provisions to clean up after its eventual shut down.

Where is the subsidy in all of that? Fossil fuels freely spew CO2 and pollutants into the air and water. Coal leaves huge piles of cinder behind. Neither wind nor solar has decommissioning funds. In 20 – 30 years the landscape will be littered with failed towers and panels, which no one will pay to manage properly.

Compared to other energy sources, nuclear is totally pay as you go.

The energy departments total budget is $30 billion. Even if every dollar of that was somehow subsidizing nuclear energy in the USA, it would still be only $300 million per reactor. With each reactor generating an average of 7.5 billion KWHr per year, that would be a total subsidy of $.04 / KWHr. About what wind and solar receive in reality. But the idea that DOEs total budget all subsidizes nuclear is absurd on the face of it. Much of DOEs budget is concerned with management of the nuclear weapons and the facilities which build and store them and their materials.

If anything, some of the weapons management spending is falsely attributed to nuclear electricity generation in the official subsidy numbers.

So, no, nuclear electricity is not receiving a large subsidy. It’s receiving about the same amount as coal and gas, and more than 20 times less than wind and solar. And it pays more so that it can be the ecologically responsible power source we have, containing and managing all of its own waste, and providing for it’s own eventual decommissioning.

No other electricity source in the USA comes close to paying all its own costs and managing all it’s own impacts on the ecology.

You wrote:“Every nuclear power plant purchases private liability insurance. There is no insurance subsidy. The Price Waterson Act creates a pool of all the nuclear reactor’s insurance coverage in the event of a large catastrophe at a single plant.”

This misses the point, no nuclear power plant could purchase private liability insurance without the Price Waterson Act. No private insurance company would issue a policy to cover the liability full exposure. Without the Price Waterson Act no one would build a nuclear reactor because they could not obtain the necessary insurance to cover their full liability exposure.

You wrote:“Every reactor has a more than adequate de-commissioning fund held in trust, again, funded by a fee on the energy produced. Nuclear is the only source of energy in the USA which contains all of its waste, pays for all of its waste management, and has financial provisions to clean up after its eventual shut down.”

This is exactly my point. Other electric generation stations do not need such management techniques and funds. My point was that nuclear power has huge costs, such as though that you describe, which other types electricity do not have. The US government must of course handle the final disposal of nuclear wastes, e.g. spent rods and the like. How many other electric generation technologies have any waste products at all much wastes that require special disposal by the US government.

It would be helpful to enact the “dividend” part of Dr. James Hansen’s “fee and dividend” proposal [http://www.columbia.edu/~jeh1/mailings/2010/20100405_ObamaSecondChance.pdf]. In it, tax revenues

“… collected from fossil companies across-the-board at the mine, wellhead or port of entry”

would be

“divided equally among all legal adult residents, with half-shares for children up to two per family, distributed monthly”.

He notes,

“More than half of the public (those who do better than average in limiting their direct and indirect carbon emissions) will receive a dividend larger than the amount they pay in carbon fee …”

The annual tens to hundreds of billions of dollars that fossil fuel taxation, or as Hansen would have it, fossil fuel fee-taking now-a-days brings in for a typical first-world nation would no longer concentrate in the hands of its paid public servants, no longer motivate them to disserve. These dollars would now be widely and evenly dispersed among this low-emitting majority.

Waiting to see the lefties go bonkers over this. They want the whole world to stop using the fuel sources we have on Earth so they can feel good or whatever floats their boats. Nuclear!?! Bombs, man! Fracking!?! Hurting Mother Gaia!

In the book “THORIUM: energy cheaper than coal” I propose a more aggressive goal — clean electric power to undersell CO2-emitting coal and natural gas — even with out taxes that account for the public harm. It’s possible with advanced liquid fuel nuclear technology that simplifies power plant design and cuts costs. Besides Martingale and Transatomic Power, two other ventures (Flibe Energy and Terrestrial Energy) are designing such molten salt reactors that can burn thorium or uranium.

You are certainly correct, there are many advantages to a thorium based commercial nuclear reactor over the existing uranium based reactors. You did not note that there are much larger supplies of thorium than uranium, it is cheaper, and easier to handle. There is little in the way in growth of uranium sources, “peak uranium” production is a definite possibility.

However, with that said, a thorium nuclear reactor is still very expensive to build (high capital costs), expensive to staff (high labor costs), and expensive to operate (thorium is cheaper than uranium but more expensive than coal). Unlike uranium based commercial reactors, thorium based reactors will not enjoy extensive US government subsidies, which is the only reason that the former exist. It has to be remembered that the “ultra-long-lived Transuranics” which are now viewed as a defect were originally views as assets. Admiral Hyman Rickover (“Father of the Nuclear Navy”) oversaw the US Navy’s nuclear submarine program following WWII and it was he who decided (obviously based on staff recommendations) to use uranium rather thorium as fuel even though thorium was cheaper and more available. He chose uranium-235 because, unlike thorium for example, it is fissile, and a fission based reactor makes much more sense in submarines. Uranium fission of course produces plutonium-239, which can be used to make nuclear weapons. In the late 1940’s and ‘50’s this was seen as a benefit and a key factor Admiral Rickover’s decision making process.

Similarly, the decision to use light water as the coolant was based upon the realities of submarine engineering. The Navy also needed a reactor that was small enough to fit in a submarine and which would produce large quantities of energy (i.e. heat). This is why the submarine reactor has such high energy densities. The first US nuclear submarine, the USS Nautilus, launched in January 1955, was powered by uranium oxide fuel, was light water cooled, and had a higher energy density. The submarine took to sea in January 1955. The first commercial nuclear power plant in the US (Shippingport Atomic Power Station) was in fact modeled after the reactor in the Nautilus, it was fission based, uranium fueled, light water cooled, high energy density reactor.

From a strictly engineering perspective for civilian electricity generation this does not actually make a lot of sense. As noted above thorium has many economic advantages over uranium. Thorium is ‘fertile’ and upon absorbing a neutron will transmute to uranium-233 (U-233), which is an excellent fissile fuel material and in many ways would be a superior fuel for a commercial reactor. For safety reasons, a lower energy density reactor is superior. Light water is not necessarily the best coolant. Yet every reactor in the United States is following the pattern set by the Nautilus. Looking at it from the other end, there is actually little reason for a civilian electricity generator to move toward nuclear reactors in the 1950’s. They were expensive to build, fuel, and operate, especially given the Nautilus based design. Further liability exposure was enormous. No commercial reactors were constructed until after the Price-Anderson Act indemnified the proto-nuclear power industry. Moreover, there is the issue of having a sufficient “critical mass” of nuclear research. The cost of research is enormous and it would be even larger if there were several different designs. A low energy density thorium reactor for civilian power use and a high energy density uranium reactor for naval use would have driven research costs even higher. The civilian nuclear power industry was heavily subsidized by the federal government for this reason.

So while there are many technical and engineering reasons that a thorium reactor is indeed superior to the existing uranium reactors, the economic disadvantages greater weight against their use.

This all sounds so technical and explained when we lose sight of the bigger picture. We are on a very short and unsustainable course. Neither growth, nuclear, gas, or oil, or genetically modified food is the right answer. We need renewable energy like wind, sun, propulsion; greenhouse food development; electrified roads; encourage self sustained urban clustered growth; energy conservation using grid technology and a move towards DC power; and we need to begin to provide incentive for drastic population decline. We have to start to see past the front our noses. A change on ethos. Why are these goals so hard to imagine? Why not have intelligent conversations about how to achieve these goals?

Germany has spent more than $250 billion on “renewable” energy source as you suggest. They have not reduced their CO2 emissions in any substantial way. Their program is an abject failure, and they now pay the 2nd highest electricity prices in Europe, right behind Denmark.

Furthermore, if you believe we should all start doing without modern conveniences, you go first. Move to a place with no electrical grid. All those things you suggest are either a failure, where tried, such as in Germany and Denmark, or cost even more money, such as the so-called “smart-grid”. The smart-grid is really just rolling brown outs and black outs carried out retail instead of wholesale and in a much more expensive manner.

If you want population decline, please remove yourself from the population. Your suggestions are evil on their face and would condemn a huge portion of the human race to poverty (no increase in energy production) and the rest of humanity to a police state nightmare where reproduction is violently controlled.

If you actually care about people, then you should be advocating the quickest build-out of nuclear electricity generators possible in order to bring electricity and the high standard of living that comes with it to the less developed world, and to reduce CO2 emissions in the industrialized world.

From 1976 to 1992, in just 16 years, France converted over 70% of their electricity generation to nuclear. They now enjoy the lowest CO2 emissions per GDP in the industrialized world, some of the cleanest air in Europe, the 7th lowest electricity prices in Europe, and are the largest electricity exporter in the world.

Only slightly behind France is the province of Ontario in Canada. 50% of their electricity comes from nuclear electricity, and they also enjoy very low CO2 emissions. Neither one of them spent 20 years and wasted $250 billion in order to fail to reduce CO2 emissions. That’s what Germany did. They’ve wasted 20 years and $250 billion following your advice, and it has been a failure. Furthermore, it has catapulted huge portions of their population into poverty, because they can no longer pay their electric bills.

Your suggestions may not have been intended in a malicious way, but the real world shows that if your advice is followed, CO2 will not be reduced and billions will suffer.